Economies of size in the sheep industry

10 October 2017

ABARES cost of production estimates suggest that significant economies of size in the Australian sheepmeat industry offer producers a strong incentive to increase production and hence, their profitability.

The ABARES report, commissioned by MLA, presents cost of production estimates for sheep producers for the three years ending 2015-16, based on data that ABARES collects on broadacre farms through its Australian Agricultural and Grazing Industries Survey (AAGIS).

Producers can use this report to compare the cost of production of their sheep flock with the industry average, and possibly identify opportunities for improvements within their business.

From 2013-14 to 2015-16, wool, lamb and sheep prices increased. However, the on-farm per kilogram cost of sheep production also lifted over the same period (in real terms). For the three years, the national average total cost of sheep production was 311¢/kg live weight (lwt) for all sheep producers and 298¢/kg lwt for slaughter lamb producers.

For slaughter lamb producers, spending was higher across most cost components in 2015-16, compared to the previous year. Poor seasonal conditions across much of the south-east saw expenditure on fodder rise 28% year-on-year. The cost of sheep purchases was up 25% in 2015-16, as a result of higher lamb and sheep prices.

However, the survey results show that the average cost of production declined as lamb production increased. For the three years to 2015-16, the total cost of production (including the value of unpaid labour) for the smallest slaughter lamb enterprises surveyed (200 to 500 lambs sold) averaged 366¢/kg, whereas the cost of production for slaughter lamb producers selling more than 2,000 lambs averaged 257¢/kg. As the level of production increased, the decline in cash costs of production was fairly minimal, however the cost of capital depreciation and value of unpaid labour were considerably lower.

Operating margins (receipts per kilogram minus cost of production) also recorded an increase in 2015-16, even when the value of unpaid labour was taken into consideration, as the lamb, sheep and wool markets strengthened. The operating margin for slaughter lamb producers averaged 54¢/kg lwt in 2015-16, up from 26¢/kg in 2014-15.

Operating margins increased as the scale of production increased. For example, when accounting for all costs, the operating margin for smaller producers (selling 200 to 500 head) averaged 2¢/kg lwt, while those that sold more than 2,000 head for slaughter achieved an average margin of 80¢/kg lwt.